ACCT 3190 Intermediate II CH. 12 Smartbook

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of

$20,000 to Discounts $520,000 to Cash

James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lack significant influence over Mark Corp. James Company should

Credit dividend revenue

10. Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale?

Credit investment in bonds $100,000 Credit to fair value adjustment $1,000 Debit to cash $99,000 Debit to discount $2,000

Characteristics that support classification of investments as trading securities include

Frequent and active trading Motivation to realize short-term profits

Which of the following are correct regarding the financial statement presentation of HTM securities?

Gains and losses are shown in net income in the period in which the securities are sold. Unrealized holding gains and losses are disclosed in the notes to the financial statements.

10. Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?

Net income may otherwise appear more volatile than it actually is

10. If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using ____ techniques.

Present value

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as

a held-to-maturity security.

Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be

an increase in other comprehensive income.

If the market rate of interest rises after a bond is purchased, the bond incurs

an unrealized holding loss.

Equity investments for which the investor does not have significant influence are classified as ____ in the balance sheet.

current assets and noncurrent assets

Under the equity method, if the investee company reports a net loss, the investment balance will

decrease by the investor's proportionate share of the investee's net loss.

Dividends earned on an equity investment, when there is a lack of significant influence, are credited to

dividend revenue.

10. At the end of the accounting period, trading debt securities must be adjusted to ____ value.

fair/market

Investments in debt securities classified as trading are reported on the balance sheet at

fair/market value.

Gains and losses relating to debt securities classified as trading are presented in the ____ in the periods in which fair value changes, regardless of whether they are realized or unrealized.

income statement

Cash flows from buying and selling held-to -maturity securities are typically classified as ____ activities on the Statement of Cash Flows.

investing

. Robert Company properly applies the equity method to its investment in Margit Corporation, At the end of the current year, the fair value of Robert Company's investment increased. Robert Company should

not recognize a gain.

Under the equity method, the fair value of the investment shares at the end of the reporting period is

not reported.

Cash flow related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the ____ section of the statement of cash flows.

operating

An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the

present value of the future cash flows.

Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are

recognized as other comprehensive income.

The carrying value of an equity investment consists of its initial cost plus

the investor's equity in the investee's undistributed income

Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ____ securities.

trading

Jones Financial Institution buys and sells debt securities frequently to maximize short-term gains in market value. Jones should classify its portfolio as

trading securities.

Holding bonds during periods in which the fair value of the bonds changes results in

unrealized holding gains and losses.

Gruen Corporation aquires a 25% interest in Blau Company for $1 million. The excess of investment cost over Gruen's share of the book value of Blau's net assets is solely attributable to goodwill. During the year, Blau reports income of $500,000 and declares dividends of $100,000. The carrying value of Gruen's investment at the end of the accounting period will be:

$1.1 Milliom $1 Million+(($500,000-$100,000)*25%)=$1.1 Million

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"

The investor has the ability to hold the security until maturity. The investor intends to hold the security until maturity.

Dividends cause the investor's investment in the investee's net assets to

decrease.

If a bond sells for more than its maturity value, the bond sells at a

premium.

January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding for $10 Million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018?

Debit Cash $5000 Credit Dividend Revenue $5000

True or False If the investee reports a net loss, the equity investment account is not adjusted for additional expenses.

False

Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes

Credit to investment in bonds $700,000 Debit to discount on bond investment $100,000 Credit to fair value adjustment $80,000 Debit to cash $680,000